If you are Carmen Rinehart or Kenneth Rogoff (both Harvard professors), then you are feeling pretty good right now. Their 2009 book This time is different: Eight centuries of financial folly predicted that as a result of the GFC the world economy would suffer between 7 and 15 years of slow growth, and then return to its normal growth path. See the diagram above.
In the research that led to their book, Rogoff and Rinehart studied a very large number of financial crises across different countries and through time. They found that financial crises can be categorised into one of four types on the basis of what caused the crisis. Each financial crises has its origin in either: The national government defaulting on its debt; A collapse in the exchange rate; A burst of hyper-inflation; or Losses in the banking system.
The GFC of 2007-2018 is of the last type – it began as a banking crisis, when trillions of dollars of bonds, backed by subprime loans, made their way onto the balance sheets of banks. The total losses on the write down of securities backed by sub-prime loans was $1.4 trillion.
The loss of consumer confidence and business confidence that resulted from the collapse of Fannie Mae, Freddie Mac, Lehmann Brothers, Bear Stearns, Merrill Lynch, AIG, RBS, Lloyds, etc. etc. sent the world economy into free fall. The GFC was (is) a global economic crisis that originated in the global banking system.
The ironic title of Rogoff and Rinehart’s book This time is different emphasises that in the lead up to almost every financial crises the lessons of previous crises are foolishly put to one side, so that confidence can be maintained and the party can go on, even as the crisis comes near.
Their research brings out the common threads in financial crises. In particular, it shows that it takes a long time for an economy to recover from a banking crisis. The main issue being the slow growth that must be endured during the deleveraging of the balance sheets of households, corporations and especially governments.
It takes 7-15 years on average to recover from a banking induced financial crisis. And now, 11 years into the GFC we have an acceleration of global growth that looks like it might propel the global economy to escape velocity from the GFC. Rogoff and Rinehart were steadfast in their prediction that this would happen, and here we are.